Ironically, websites and Youtube videos criticizing MLM have become so commonplace that some working within the MLM system have disguised their promotional materials to appear — at first glance — like a whistleblower’s.
For example, a Youtube user by the name “JusticesMLMreviews” uploaded a promotional video for USANA entitled “USANA Scam? Why Didn’t Other USANA Health Sciences, Inc. (NYSE:USNA) Reviewers Tell You This?” In it, he admits:
Now, if you’re watching this video… you’re out there doing some research [on USANA]. Going around the web, finding out what people are saying, finding out if USANA is a legitimate company, or if they’re a scam…Regardless of some of the negative things you may see online, USANA is definitely not a scam…Where does this stuff come from? Where does the negative stuff come from about a company like USANA? You’re gonna see negative stuff like this about a lot of network marketing companies.
The central question of MLM
Ultimately, the legality of an MLM comes down to one question: are participants involved legitimately selling goods? Or is the primary focus simply to recruit new members into the scheme?
An interesting point about Herbalife Ltd. (NYSE:HLF) in particular is the company’s practice of establishing “Nutrition Clubs.” These are locations where Herbalife Ltd. (NYSE:HLF) distributors can move their product, and apparently, recruit new members into the Herbalife distribution scheme.
Many of these Herbalife Nutrition Clubs have websites and Facebook Inc (NASDAQ:FB) pages. Consulting a few of them suggests what the Herbalife distributors are really after.
An apparent Michigan-based Herbalife distributor runs a website called “HerbalHub.” The copy on the landing page is devoted partly to weight loss, but largely to learning about “[earning] income at home.”
Investing in MLM
Since the end of December, shares of Herbalife are up an impressive 74%. Most of that rally has been prompted by the involvement of Carl Icahn, who has bought over 16% of the company’s shares since January.
Along the way there’s been some negative news, like last week’s letter from the Hispanic Federation, urging the FTC to investigate Herbalife. Still, shares have continued to power higher.
As similar multi-level marketing companies, USANA Health Sciences, Inc. (NYSE:USNA) and Nu Skin Enterprises, Inc. (NYSE:NUS) have traded largely in tandem with Herbalife, boasting their own 50%+ rallies over the same period.
Shares of all three companies should continue to move higher if Icahn is successful in squashing Ackman’s criticism. Indeed, given that the FTC has allowed Herbalife and other multi-level marketing firms to exist for decades, the safer bet might be to side with Icahn.
At the same time, it’s quite clear that MLM is, at best, a questionable business model, one that has long faced criticism and even accusations of fraud.
Short seller Jim Chanos, famed for shorting Enron ahead of its collapse, admitted on CNBC that Ackman’s analysis was “correct” because Herbalife’s business was “ultimately flawed down the road.”
Playing a short squeeze might prove profitable, but I fail to see why anyone would plan to invest in these companies over the long term. Perhaps that’s why Dan Loeb, after buying stock at the beginning of the year, recently sold his entire stake.
Other long-term investors might consider doing the same.
The article Multi-Level Marketing Is Bad Business originally appeared on Fool.com.
Salvatore “Sam” Mattera has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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